Question

Wolowitz Outer Space Ltd. has the capacity to produce 170,000 units. They presently produce and sell 130,000 units for the Canadian market at a price of $90 per unit. Howard is evaluating a special order from a French company, Poitiers Ltd. Poitiers is offering to buy 25,000 units for $75 each. Howard’s accountant has assembled the following unit cost information:

Direct materials	$32.00
Direct labour	8.00
Factory overhead – variable	15.00
Factory overhead – fixed	10.00
Selling and administrative expenses – variable - sales commission - other	4.50 2.50
Selling and administrative expenses – fixed	13.00
Total	$85.00

The sales commission would not be incurred on the units sold to Poitiers Ltd. If the order is accepted, the units would be shipped overseas for an additional shipping cost of $6 per unit. Also, in order to sell these units in France, Howard must obtain safety certification at a cost of $125,000.

Prepare a differential analysis report (relevant cost analysis) for the proposed sale to Poitiers Ltd.

Answer 1

Particulars	Amount
Variable costs:
Direct material	$                  32
Direct labor	$                    8
Factory OH variable	$                  15
Variable selling expenses	$                 4.5
Shipping cost	$                    6
Total variable cost per unit	$              65.5
× units sold	25,000
Incremental variable costs	$     1,637,500
Add: safety certification	$        125,000
Incremental total costs	$     1,762,500
Incremental sales revenue	$     1,875,000
Less: incremental costs	$   (1,762,500)
Incremental profit	$        112,500

By accepting order, profit of entity will increase by $112,500.

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